Can the Financial Reform Bill Fix the Economy?

Preface: If you’ve been too busy to pay attention to the details, and if you’re hoping that the financial reform bill which has just been passed will fix the economy, this essay will bring you up to date.

Congress, Federal Reserve chairman Ben Bernanke, Treasury Secretary Timothy Geithner and the rest of the folks who run the economy are patting themselves on the back for passing the financial “reform” legislation.

Indeed, just as BIS warned years ago, bailing out the banks has simply spread their problems into sovereign crises … and now the banks and governments are broke, and the global strategy of printing obscene quantities of money (“quantitative easing”) is debasing currencies worldwide.

“Deficit hawks” like top economic historian Niall Ferguson says that America’s debt will drive it into a debt crisis, and that any more quantitative easing will lead our creditors to pull the plug. See this, this and this. Indeed, PhD economist Michael Hudson says (starting around 4:00 into video):

If the problem that is grinding the economy to a halt is oo much debt, and if no one in the government – in either party – is looking at solving the debt problem, then … we’re going to go into a depression as far as the eye can see.

As PhD economist Dean Baker points out, the IMF is cracking down on the once-proud America like a naughty third world developing country. (As I’ve repeatedly noted, the IMF performed a complete audit of the whole US financial system during Bush’s last term in office – something which they have only previously done to broke third world nations.)

On the other hand, “deficit doves” – i.e. Keynesians like Paul Krugman – say that unless we spend much more on stimulus, we’ll slide into a depression. And yet the government isn’t spending money on the types of stimulus that will have the most bang for the buck: like giving money to the states, extending unemployment benefits or buying more food stamps – let alone rebuilding America’s manufacturing base. See this, this and this.

Nobel prize winning economist George Akerlof predicted in 1993 that credit default swaps would lead to a major crash, and that future crashes were guaranteed unless the government stopped letting big financial players loot by placing bets they could never pay off when things started to go wrong, and by continuing to bail out the gamblers. (Not only has the government rewarded the gamblers, bailed them out and let them engage in a new round of risky betting, but it hasn’t even meaningfully reined in credit default swaps.)

Paul Volcker is warning that the watered-down Volcker rule (which won’t even kick in for some time) won’t prevent the next crisis. Similarly, one of the primary authors of the legislation – Chris Dodd – long ago said the bill wouldn’t prevent future crises.

Shady accounting is part of what got us into this mess … but as Citigroup Inc. analyst Keith Horowitz notes, banks are making huge amounts of money from an accounting rule that allows banks to book profits when the value of their own bonds falls.

The Fed is now warning that it could be 5 to 6 years before the economy recovers, and that there is a “significant downside risks” and a possible slide into deflation. That’s not a big surprise … Ben Bernanke doesn’t understand that liquidity was never the problem, and he has continued the same behavior which got us into this mess in the first place. Bernanke and the Fed have caused widespread destruction to the economy (see this, this, this and this). And yet the financial reform bill gives the Fed has more – instead of less – power.

FAIR USE NOTICE: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of political, economic, scientific, and educational issues. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. For more information go to: